Solution manual managerial accounting by cabrera 2010 chapter 16 answer

Cost control and cost reduction are not the same, but cost reduction does affect the standards which are used as basis for cost control.. Several factors other than the contractual rate

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CHAPTER 16

STANDARD COSTS AND OPERATING

PERFORMANCE MEASURES

I Questions

1 Standard costs are superior to past data for comparison with actual costs because they ask the question “Is present performance better than the past?”

2 No Cost control and cost reduction are not the same, but cost reduction does affect the standards which are used as basis for cost control Cost reduction means finding ways to achieve a given result through improved design, better methods, new layouts and so forth Cost reduction results in setting new standards On the other hand, cost control is a process of maintaining performance at or as new existing standards as is possible

3 Managerial judgment is the basis for deciding whether a given variance

is large enough to warrant investigation For some items, a small amount of variance may spark scrutiny For some items, 5%, 10% or 25% variances from standard may call for follow-up Management may also derive the standard deviation based on past cost data

4 The techniques for overhead control differ because

1) The size of individual overhead costs usually does not justify elaborate individual control systems;

2) The behavior of individual overhead item is either impossible or difficult to trace to specific lots or operations; and

3) Various overhead items are the responsibility of different people

5 In the year-to-year planning of fixed costs, managers must consider: 1) the projected maximum and minimum levels of activity,

2) prices of cost factors, and

3) changes in facilities and organization

6 Four criteria for selecting a volume base are:

1) Cause of cost variability

2) Adequacy of control over the base

3) Independence of activity unit

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4) Ease of understanding.

7 Non-volume factors which cause costs to vary are:

1) Changes in plant and equipment

2) Changes in products made, materials used, or methods of manufacturing

3) Changes in prices paid for cost factors

4) Changes in managerial policy toward costs

5) Lag between cost incurrence and measurement of volume

8 A budget is usually expressed in terms of total pesos, whereas a standard is expressed on a per unit basis A standard might be viewed

as the budgeted cost for one unit

9 Under management by exception, managers focus their attention on operating results that deviate from expectations It is assumed that results that meet expectations do not require investigation

10 Separating an overall variance into a price variance and a quantity variance provides more information Moreover, prices and quantities are usually the responsibilities of different managers

11 The materials price variance is usually the responsibility of the purchasing manager The materials quantity variance is usually the responsibility of the production managers and supervisors The labor efficiency variance generally is also the responsibility of the production managers and supervisors

12 If used as punitive tools, standards can breed resentment in an organization and undermine morale Standards must never be used as

an excuse to conduct witch-hunts, or as a means of finding someone to blame for problems

13 Several factors other than the contractual rate paid to workers can cause a labor rate variance For example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call for low hourly rates of pay, resulting in an unfavorable rate variance Or unskilled or untrained workers can be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a favorable rate variance Unfavorable rate variances can also arise from overtime work at premium rates

14 Poor quality materials can unfavorably affect the labor efficiency variance If the materials create production problems, a result could be excessive labor time and therefore an unfavorable labor efficiency

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variance Poor quality materials would not ordinarily affect the labor rate variance

15 If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency variances is for every workstation

to produce at capacity However, the output of the entire system is limited by the capacity of the bottleneck If workstations before the bottleneck in the production process produce at capacity, the bottleneck will be unable to process all of the work in process In general, if every workstation is attempting to produce at capacity, then work in process inventory will build up in front of the workstations with the least capacity

II Matching Type

III Exercises

Exercise 1 (Setting Standards; Preparing a Standard Cost Card)

Requirement 1

Cost per 2 kilogram container P6,000.00 Less: 2% cash discount 120.00 Net cost P5,880.00 Add freight cost per 2 kilogram container

(P1,000 ÷ 10 containers) 100.00 Total cost per 2 kilogram container (a) P5,980.00 Number of grams per container

(2 kilograms × 1000 grams per kilogram) (b) 2,000 Standard cost per gram purchased (a) ÷ (b) P 2.99

Requirement 2

Beta ML12 required per capsule as per bill of materials 6.00 grams Add allowance for material rejected as unsuitable

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6.25 grams – 6.00 grams = 0.25 grams) Total 6.25 grams Add allowance for rejected capsules

(6.25 grams ÷ 25 capsules) 0.25 grams Standard quantity of Beta ML12 per salable capsule 6.50 grams

Requirement 3

Item Standard Quantity per Capsule Standard Price per Gram Standard Cost per Capsule

Exercise 2 (Material Variances)

Requirement 1

Number of chopping blocks 4,000 Number of board feet per chopping block × 2.5 Standard board feet allowed 10,000 Standard cost per board foot P1.80× Total standard cost P18,000 Actual cost incurred P18,700 Standard cost above 18,000 Total variance—unfavorable P 700

Requirement 2

Actual Quantity of Inputs, at

Actual Price

Actual Quantity of Inputs, at Standard Price

Standard Quantity Allowed for Output, at Standard Price (AQ × AP) (AQ × SP) (SQ × SP)

P18,700 11,000 board feet ×

P1.80 per board foot P1.80 per board foot10,000 board feet ×

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Price Variance, P1,100 F

Quantity Variance, P1,800 U Total Variance, P700 U

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Materials Price Variance = AQ (AP – SP)

11,000 board feet (P1.70 per board foot* – P1.80 per board foot) =

P1,100 F

* P18,700 ÷ 11,000 board feet = P1.70 per board foot

Materials Quantity Variance = SP (AQ – SQ)

P1.80 per board foot (11,000 board feet – 10,000 board feet) = P1,800 U

Exercise 3 (Labor and Variable Overhead Variances)

Requirement 1

Number of units manufactured 20,000 Standard labor time per unit × 0.4* Total standard hours of labor time allowed 8,000 Standard direct labor rate per hour × P6 Total standard direct labor cost P48,000

*24 minutes ÷ 60 minutes per hour = 0.4 hour

Actual direct labor cost P49,300 Standard direct labor cost 48,000 Total variance—unfavorable P 1,300

Requirement 2

Actual Hours of Input, at

the Actual Rate

Actual Hour of Input, at Standard Rate

Standard Hours Allowed for Output, at the Standard Rate (AH × AR) (AH × SR) (SH × SR)

P49,300 8,500 hours × P6 per hour 8,000 hours* × P6 per hour

*20,000 units × 0.4 hour per unit = 8,000 hours

Rate Variance, P1,700 F

Efficiency Variance, P3,000 U Total Variance, P1,300 U

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Alternative Solution:

Labor Rate Variance = AH (AR – SR)

8,500 hours (P5.80 per hour* – P6.00 per hour) = P1,700 F

*P49,300 ÷ 8,500 hours = P5.80 per hour

Labor Efficiency Variance = SR (AH – SH)

P6 per hour (8,500 hours – 8,000 hours) = P3,000 U

Requirement 3

the Actual Rate Actual Hour of Input, at Standard Rate Output, at the Standard RateStandard Hours Allowed for (AH × AR) (AH × SR) (SH × SR)

P39,100 8,500 hours × P4 per hour 8,000 hours × P4 per hour

Alternative Solution:

Variable Overhead Spending Variance = AH (AR – SR)

8,500 hours (P4.60 per hour* – P4.00 per hour) = P5,100 U

*P39,100 ÷ 8,500 hours = P4.60 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

P4 per hour (8,500 hours – 8,000 hours) = P2,000 U

Exercise 4 (Working Backwards from Labor Variances)

Requirement 1

If the total variance is P330 unfavorable, and if the rate variance is P150 favorable, then the efficiency variance must be P480 unfavorable, since the rate and efficiency variances taken together always equal the total variance

Knowing that the efficiency variance is P480 unfavorable, one approach to the solution would be:

Efficiency Variance = SR (AH – SH)

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Spending Variance, P5,100 U

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P6 per hour (AH – 420 hours*) = P480 U

P6 per hour × AH – P2,520 = P480**

P6 per hour × AH = P3,000

AH = 500 hours

* 168 batches × 2.5 hours per batch = 420 hours

** When used with the formula, unfavorable variances are positive and favorable variances are negative

Requirement 2

Knowing that 500 hours of labor time were used during the week, the actual rate of pay per hour can be computed as follows:

Rate Variance = AH (AR – SR)

500 hours (AR – P6 per hour) = P150 F

500 hours × AR – P3,000 = –P150*

500 hours × AR = P2,850

AR = P5.70 per hour

* When used with the formula, unfavorable variances are positive and favorable variances are negative

IV Problems

Problem 1 (Comprehensive Variance Analysis)

Requirement 1

a

the Actual Price Actual Quantity of Inputs, at Standard Price Standard Quantity Allowed forOutput, at the Standard Price (AQ × AP) (AQ × SP) (SQ × SP)

25,000 pounds x

P2.95 per pound 25,000 pounds xP2.50 per pound 20,000 pounds* x P2.50 per pound

Price Variance, P11,250 U 19,800 pounds x P2.50 per

pound

= P49,500Quantity Variance,

P500 F

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* 5,000 metal molds × 4.0 pounds per metal mold = 20,000 pounds

Alternatively:

25,000 pounds (P2.95 per pound – P2.50 per pound) = P11,250 U

P2.50 per pound (19,800 pounds – 20,000 pounds) = P500 F

b

the Actual Rate Actual Hours of Input, at the Standard Rate Output, at the Standard RateStandard Hours Allowed for (AH × AR) (AH × SR) (SH × SR)

3,600 hours x

P8.70 per hour P9.00 per hour3,600 hours x 3,000 hours* x P9.00 per hour

* 5,000 metal molds × 0.6 hour per metal mold = 3,000 hours

Alternatively:

3,600 hours (P8.70 per hour – P9.00 per hour) = P1,080 F

P9.00 per hour (3,600 hours – 3,000 hours) = P5,400 U

c

P4,320 1,800 hours × P2 per hour 1,500 hours* × P2 per hour

*5,000 metal molds × 0.3 hours per metal mold = 1,500 hours

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Rate Variance, P1,080 F

Spending Variance, P720 U

Efficiency Variance, P600 U Total Variance, P1,320 U

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1,800 hours (P2.40 per hour* – P2.00 per hour) = P720 U

* P4,320 ÷ 1,800 hours = P2.40 per hour

Variable Overhead Efficiency Variance = SR (AH – SH)

P2.00 per hour (1,800 hours – 1,500 hours) = P600 U

Requirement 2

Summary of variances:

Material price variance P11,250 U Material quantity variance 500 F Labor rate variance 1,080 F Labor efficiency variance 5,400 U Variable overhead spending variance 720 U Variable overhead efficiency variance 600 U Net variance P16,390 U The net unfavorable variance of P16,390 for the month caused the plant’s variable cost of goods sold to increase from the budgeted level of P80,000

to P96,390:

Budgeted cost of goods sold at P16 per metal mold P80,000 Add the net unfavorable variance (as above) 16,390 Actual cost of goods sold P96,390 This P16,390 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net loss for the month

Budgeted net operating income P15,000 Deduct the net unfavorable variance added to cost of goods

sold for the month 16,390 Net operating loss P(1,390)

Requirement 3

The two most significant variances are the materials price variance and the labor efficiency variance Possible causes of the variances include:

Materials Price Outdated standards, uneconomical quantity

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Variance: purchased, higher quality materials,

high-cost method of transport

Labor Efficiency

Variance: Poorly trained workers, poor quality materials, faulty equipment, work

interruptions, inaccurate standards, insufficient demand

Problem 2

Problem 3

Material mix variance:

Actual quantity x Standard price

Material A (8,000 x P0.30) P2,400 Material B (2,400 x P0.20) 480 Material C (2,800 x P0.425) 1,190 P4,070 Less: Total actual input x Average

Standard price (13,200 x 0.30*) 3,960

* Average Standard price = = P0.30

Material yield variance:

Total actual input at Average Standard price P3,960 Less: Total actual output at Standard raw material cost

** Standard Material Cost = = P0.36

Problem 4 (Comprehensive Variance Analysis; Journal Entries)

Requirement 1

16-10

P 720 2,400

P 720 2,000

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Actual Price

Actual Quantity of Inputs, at Standard Price

Standard Quantity Allowed for Output, at Standard Price (AQ × AP) (AQ × SP) (SQ × SP)

21,120 yards x

P3.35 per yard 21,120 yards x P3.60 per yard 19,200 yards* x P3.60 per yard

* 4,800 units × 4.0 yards per unit = 19,200 yards

Alternatively:

21,120 yards (P3.35 per yard – P3.60 per yard) = P5,280 F

P3.60 per yard (21,120 yards – 19,200 yards) = P6,912 U

Raw Materials (21,120 yards @ P3.60 per yard) 76,032 Materials Price Variance

(21,120 yards @ P0.25 per yard F) 5,280 Accounts Payable

(21,120 yards @ P3.35 per yard) 70,752 Work in Process (19,200 yards @ P3.60 per

yard) 69,120 Materials Quantity Variance

(1,920 yards U @ P3.60 per yard) 6,912 Raw Materials (21,120 yards @ P3.60 per

yard) 76,032

Requirement 2

a

6,720 hours* x

P4.85 per hour

6,720 hours x P4.50 per hour

7,680 hours** x P4.50 per hour

Price Variance, P5,280 F

Quantity Variance, P6,912 U Total Variance, P1,632 U

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= P32,592 = P30,240 = P34,560

* 4,800 units × 1.4 hours per unit = 6,720 hours

** 4,800 units × 1.6 hours per unit = 7,680 hours

Alternatively:

6,720 hours (P4.85 per hour – P4.50 per hour) = P2,352 U

P4.50 per hour (6,720 hours – 7,680 hours) = P4,320 F

Work in Process (7,680 hours @ P4.50 per

hour) 34,560 Labor Rate Variance

(6,720 hours @ P0.35 per hour U) 2,352 Labor Efficiency Variance

(960 hours F @ P4.50 per hour) 4,320 Wages Payable (6,720 hours @ P4.85 per

hour) 32,592

Requirement 3

6,720 hours x

P2.15 per hour 6,720 hours x P1.80 per hour P1.80 per hour7,680 hours x

Alternatively:

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Rate Variance, P2,352 U

Efficiency Variance, P4,320 F Total Variance, P1,968 F

Spending Variance, P2,352 U

Efficiency Variance, P1,728 F Total Variance, P624 U

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